An Analysis of Nonlinearities,Heteroscedasticity, and Functional Form in the Market Model |
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Authors: | Bill McDonald Cheng-Few Lee |
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Institution: | 1. Department of Finance and Business Economics , University of Notre Dame , Notre Dame , IN , 46556;2. Department of Finance , Rutgers University , Newark , NJ , 07102 |
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Abstract: | Using a generalized specification of the single-index market model, this study examines the sources of statistical anomalies previously found in estimating the market model. Two generalized models are developed for juxtaposition with the traditional linear specification. The most general model is a Box–Cox model with different λ's and heteroscedastic errors. The empirical results indicate that previous findings of significant “nonlinearities” are primarily attributable to nonnormalities and unequal variance. |
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Keywords: | Asset pricing Box-Cox model Nonnormalities |
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